1. Managing in an Uncertain Future, or, “Change Comes in Many Flavors… but You Don’t Get to Pick” A Presentation to CREW-Miami By Hugh F. Kelly, PhD, CRE Four Seasons Hotel Miami, FL January 17, 2012

2. Miami Is 'Worst-Run' City in America: Report Magic City tops list of America's worst-run cities, Hialeah close behind By Brian HamacherBrian Hamacher | Monday, Jan 9, 2012 | Updated 11:38 AM EST Violent crime, poverty, low education rate and a crippled housing industry helped Miami reach the top spot in 24/7 Wall Street's first-annual list of the worst-run cities in America.24/7 Wall Street's first-annual list of the worst-run cities

4. Quick Overview for 2011 Capital flowing to real estate again, with equity risk premiums of 13.5%- 15.5% indicated for cap rates in 7%-7.5% range Supply pipeline is lean, and will stay that way Absorption starting to push vacancy rates down, with wide spread between best/worst markets and property types

5. Capital Indeed Returning to Real Estate But Miami Punching Below Its Weight MiamiSales Volume Rank in U.S. % of U.S. Inv. Office$590 M18 th 1.3% Apts.$299 M36 th 0.7% Retail$735 M10 th 2.0% Industrial$265 M27 th 1.0% Hotel$627 M6 th 3.6% Source: Real Capital Analytics: “The Big Picture, December 2011” Data YTD sales through Nov. 2011.

6. The “Five Flavors” of Change  Cycles  Trends  Maturation  Change of State  Disruption

7. Cycles Periodic fluctuations around equilibrium Keys: amplitude and duration – Amplitude: practical constraints marking peaks and troughs – Duration: fluidity of system in accommodating change Science: Signal Theory Application: all market-oriented, transaction-based systems

8. Non-Farm Employment and Real GDP Year-over-year change

9. U.S. Economy Has Seen 10 Consecutive Quarterly Gains. Outlook sees 2% - 3% Real Growth through 2012. Source: Blue Chip Economic Indicators January 10, 2012 We are here.

10. Array of Forecasts Shifting Toward the Positive Pole Over Coming Two Years Number of Forecasts at Growth Rate Source: Blue Chip Economists Forecast as of January 10, 2012

11. Joblessness Still Elevated, With Risk of High Unemployment Persisting, but the Potential for Change is Subject to Much Debate! Sources: Actual Historical Data from Bureau of Labor Statistics; Forecasts from Blue Chip Economic Indicators, as of January 10, 2012 Percent

12. Fed Accommodative Policies and Flight to U.S. Treasuries Extending Historic Era of Low Interest Rates Source: Blue Chip Economic Indicators January 10, 2012 Near zero-percent short-term rates now considered likely throughout the coming year as Fed continues to battle high unemployment and sluggish GDP

13. Political Dysfunction Means Economic Policy Is Rowing With Just One Oar Monetary and Fiscal Policy Are Obviously Not in Synch. Austerity in Fragile Economy Impacting State and Local Governments Severely, and Retarding Overall Economic Growth. Domestic and Eurozone Concerns Are Conspiring to Limit Investment Spending and Hiring.

14. So, “Where are we in the cycle” might be the wrong question! The economic change we are coping with is clearly not a typical cycle. Unlike the early 1990s real estate collapse, this market is coping with a fundamental dislocation in the global economic and financial system Although U.S. commercial real estate retains its cyclical character, the strength of fundamental demand is being sapped by macro trends, including financial market fear. Therefore we need to look at non-cyclical forms of change to diagnose and to prescribe (pardon my “doctor-talk”).

15. Disruption Sudden and profound shock to system Keys: radical challenge to system integrity; alteration of paradigm; reconceptualization Behaviors: may be revolutionary (novus ordo saeclorum), or may prompt a compensatory return to new stasis (if not status quo ante) Science: particle physics; medicine Applications: 9/11; Katrina; 1970s OPEC influences; and, most recently, the “Panic of 2008” and its aftermath

16. OPEC Shocks of 1970s Offer a Good Illustration of “Disruptive Change” After nearly 40 years of history, that change is not generally understood. In “real dollar” terms, oil prices were at historically low levels as recently as 2003. But we have never returned to pre-1973 price stability. This means that “event risk” has become a permanent factor for this commodity.

17. Recurrent Crises Betray Structural Weakness Of Financial System in Past Quarter-Century Undercapitalized Banks by BIS Standards Mexican Peso Crisis and Orange County Bankruptcy Thai Baht, Russian Default, LTCM Dot-Bomb; 9/11

18. The Systemic Disruption of the Financial System Signals a Need for Structural Change What is your judgment? To what degree should we ‘allow the markets to correct themselves’? What is the appropriate level of oversight on banking and credit? How do you connect the dots?

19. Complexity Theory Teaches Us About “Exponential Growth”

20. Maturation Organic adaptation to habitat and “unfolding” of system potential Keys: resource availability; system interactions; definition of niche; sustainability Behavior modeled on ecology (related to economy Science: Biology Applications: Highest and best use; segment growth

21. Time Resources Basic Sigmoid (“S”) Curve

22. Changes of State Fundamental yet short-run (potentially reversible) alteration of system conditions Keys: volatility of system; knowledge of critical points; boundary conditions affecting control; external pressures Behaviors radically changed though basic elements may be constant Science: molecular structure; chemistry Applications: Liquidity conditions; “tenant/landlords markets”

23. Changes of State Vacancy Rent low high Landlord’s Market Tenant’s Market

24. Trends Long-term shifts in system Keys: fundamental but gradual alterations of quality/quantity of system elements Behavior can be constructed along the lines of Newton’s Laws of Motion: interia; entropy Science: Classical Physics Applications: demography; occupational/industry structural change

25. Try a Thought Experiment Think of Miami in 2022: Is it different from today? How? Demographically Economically Ecologically As a community As a real estate market

26. Don’t Despair: Complexity Can Yield Beautiful Results

27. May Your 2012 – However Complex and Changing – Be a Path of Beauty!

28. Nearly One-in-Seven Young Adults Back Home with Parents